Negotiable transactions typically involve the following parties: a payor, a payee, and a corresponding financial institution such as a bank or other type of intermediary such as a clearing-house. A negotiable document or instrument issued as a form of payment, for instance a check, is used by the financial institution to transfer funds between accounts, typically to credit the payee's account and debit the payor's account. Information about all parties involved in the transaction is contained in the negotiable document.
Traditionally, the payor's handwritten signature has been used as an indicia of the authenticity of the document and the information contained therein. The underlying reasons for this include: (1) a signature is assumed to be difficult to forge, thereby serving as proof that the signor is cognizant of and in agreement with the contents of the document, particularly the amount and identity of the payee; (2) a signature is assumed to be non-reusable—it is thought of as being an integral or inseparable part of the document and cannot easily be transferred to, or reproduced onto, another document; (3) once signed, it is assumed that the document cannot be modified or altered; and (4) it is generally assumed that the signature cannot be repudiated. In reality, these assumptions are generally false. Unless a financial clerk has access to a large and extremely fast graphical database of payor signatures, it is very difficult for the clerk to reliably detect forged signatures when processing checks. Nor have electronic systems progressed to the point where they can accurately or consistently identify forged signatures. Even if a signature is authentic, it is not very difficult to alter documents after being signed, particularly the monetary value of the document or the identity of the payee. Moreover, the entire check may be fraudulently produced such that no alterations or additions to the negotiable document may be readily discerned.
Check fraud has been considered to be the third largest type of banking fraud, estimated to be about fifty million dollars per year in Canada according to a KPMG Fraud Survey Report. In the United States, such fraud is estimated to cause financial loss of over ten billion dollars per year. Financial institutions and corporations spend a great deal of time, effort and money in preventing or recovering from fraudulent checks. With the recent proliferation and affordability of computer hardware such as document scanners, magnetic-ink laser printers, etc., check fraud is expected to reach new limits.
To date, various attempts have been made to protect checks from fraudulent interference of the type described above. One method is to use mechanical amount-encoding machines which create perforations in the document reflecting the monetary value thereof. The perforations in the document define the profile of an associated character or digit. However, a check forger can still scan the payor's signature and reprint the check with a new amount using the same type of readily available mechanical encoding machine to apply the perforations. This method also has a significant drawback due to the amount of time and human labor required to produce checks, and thus may be considered expensive or impractical for certain organizations.
Another prior art check protection method uses electronic means to print the numerical amount of the check using special fonts, supposedly difficult to reproduce. A negotiable document is considered unforged if it contains the special font and if the characters representing the monetary value of the check are not tampered with. Due to the fact that these characters are difficult to produce without a machine or a computer, the check is assumed to be protected. Given the ready availability of high quality scanners and printers, it is, however, possible that the check forger will copy one of the characters printed on the check and paste it as the most significant digit of the amount thereby increasing the monetary amount of the transaction. As such, after the forger reprints the check with a new most significant digit, the check will meet the criteria of having the special fonts defining the numerical amount, whereby the forged document may be interpreted as a valid check.
Other types of check validation techniques are disclosed in U.S. Pat. No. 4,637,634 to Troy et al. This reference discloses a sales promotional check which consists of a top check half, distributed through direct mail, flyers, newspaper inserts, etc., and a bottom check half which may be obtained, for example, when a stipulated purchase of goods or services has been made by the intended payee. If information on the top and bottom halves match, the check becomes a negotiable instrument. For validation purposes, the bottom half is provided with at least one code number that is generated, using a complex mathematical formula, from the check number, the register number, and the script dollar amount, all of which are present on the face of the check in human-readable form. The validation code number appears as a bar code or other machine readable code on the face of the check. For verification purposes, the same code number appears underneath an opaque “rub-off” overlay which, if tampered with, renders the check void. To verify the check, the opaque overlay is removed to reveal the concealed code number which is then compared against the machine readable code number printed on the check. This system is still prone to tampering because one could alter the amount of the check without tampering with the code numbers. To avoid this situation, the check must be compared against a predefined list, i.e. an electronic file, listing all of the payor's checks to verify the original amount. Thus, this system may therefore be impractical for most organizations and is incompatible with current check clearing procedures.
There remains a need for securing information associated with negotiable documents from being fraudulently tampered with. Moreover, there remains a need for such a security system which is compatible with current check printing systems and check clearing systems, and which generates checks that are essentially unforgeable.